GM reaches tentative agreement with union

Stock jumps with production set to resume; 74,000 return to work

ChristopherHinton

SAN FRANCISCO (MarketWatch) -- General Motors Corp. shares jumped as much as 10.7% on Wednesday after the Detroit automaker hammered out a deal with the United Auto Workers, marking an end to a two-day strike and allowing production to resume.

The stock
GM, +3.40%
pulled back only slightly from session highs to finish up $3.22 at $37.64.

Ford Motor Co.
F, +1.07%
shares also closed higher, up 54 cents, or 6.5%, at $8.88. The four-year labor contract notched between GM and the UAW will serve as the blueprint for talks with both Ford and Chrysler.

UAW President Ron Gettelfinger said a decision on which car maker the union will target for contract negotiations next could be made on Thursday.

As for General Motors, the agreement, as expected, includes a memorandum of understanding to establish an independent retiree health-care trust, which would relieve the company of more than $50 billion of debt owed to the UAW.

The shift will likely cost GM about $35 billion but it caps the future health-care liability for the company.

GM, in anticipation of such a deal, has been building up cash reserves for more than a year by selling assets like most of its financial division and the Allison Transmission unit.

"There's no question this was one of the most complex and difficult bargaining sessions in the history of the GM/UAW relationship," Rick Wagoner, GM's Chairman and CEO, said in a statement.

Further details will not be published until after the deal is ratified, a process that will begin this week. The health-care plans will also need to be approved by the courts and the Securities and Exchange Commission.

But people familiar with the negotiations outlined the key tenets of the agreement, which could include mechanisms for General Motors to buy out costly long-time employees and replace them with new workers earning far less.

This would help GM remedy what it claims is a wage and benefits gap of $25 to $30 an hour with foreign competitors, particularly Toyota Motor Corp.
TM, +0.14%

Blue-collar workers, in return, will receive a $3,000 signing bonus, commitments that GM will invest in UAW-represented factories in the U.S. and other benefit improvements.

The controversial jobs bank, which allows laid-off workers to still receive most of their compensation, will remain, but there will be modifications aimed at trimming the amount of workers sitting idle and still drawing a paycheck.

Wall Street approves

Merrill Lynch analyst John Murphy praised the deal in a note to clients.

"We believe this is a very positive development for GM as it will eliminate the massive retiree health-care liability that has been crowding out equity for years, boost cash flow, and ultimately position the company on a level playing field with its Asian rivals," he said.

Standard & Poor's analyst Bob Schulz gave GM's long-term ratings a positive outlook, saying that while many of its cost-side hurdles have likely been cleared, challenges remain.

"Now it's back to the product pipeline," he said. "Even with a positive contract, GM still has to face a competitive full-size truck market and a difficult U.S. economic climate."

Schulz also put Ford on its watch list with a positive outlook.

"We believe it is increasingly likely, based on the pattern set by GM's tentative deal, that Ford and Chrysler will reach a broadly similar agreement to reduce their own onerous OPEB liabilities," he said.

And Brett Hoselton, an analyst at KeyBanc Capital Markets, said the agreement also significantly increases the chance that suppliers such as American Axle & Manufacturing Holdings Inc.
AXL, +0.61%
will be able to negotiate similar deals.

Too much to lose

Some 74,000 UAW members walked out of GM plants nationwide on Monday after a week of intense negotiations failed to produce a new labor contract. The two sides have been at the bargaining table since the last contract expired Sept. 14.

In deciding to go on strike, the UAW accused GM of failing to "address job security and other mandatory issues of bargaining."

Don Schroeder, a labor attorney for law firm Mintz Levin in Boston, joined several Wall Street analysts who had expected a quick resolution to the work stoppage.

"This particular company and industry is in such financial straits a prolonged strike would have been absolutely crippling, there was just far too much to lose on both sides," he said.

GM is hopeful that the new deal paves the way for it to significantly improve its manufacturing competitiveness and provides a basis for maintaining and strengthening its core U.S. manufacturing operations.

"This agreement helps us close the fundamental competitive gaps that exist in our business," Wagoner said.

"The projected competitive improvements in this agreement will allow us to maintain a strong manufacturing presence in the United States along with significant future investments," he added.

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